Non-compete agreements, also called non-competition agreements, agreements not to compete, or covenants not to compete, are contracts in which one party agrees not to engage in some category of activities that would, in one way or another, compete with the business of the other party. A variation of a non-compete agreement is non-solicitation agreement in which one party agrees not to solicit customers of the other party. Along with non-raiding agreements (agreements not to solicit the employees of another person) and non-disclosure or confidentiality agreements, non-compete agreements and non-solicitation agreements make up a broader category of contracts sometimes called restrictive covenants. As “agreements in restraint of trade,” restrictive covenants they have the potential of running afoul of anti-trust law and must be carefully drafted in order to be enforceable. (Note: These contracts should not be confused with another type of “restrictive covenant,” which is a provision in a deed restricting certain uses of real property.)
First, non-compete agreements must be drafted for the purpose of protecting a legitimate business interest. An example is to protect the relationships between a business and its customers. Another is to protect the business’s confidential information. Well drafted non-compete agreements identify the legitimate business interest that is being protected.
Second, the non-compete agreement must not be unreasonably broad in scope, unreasonably broad in geographic applicability, or unreasonably long in duration. What is reasonable depends very much on the type of business and the type of legitimate business interest being protected. For example, hair salons often have non-compete agreements with their hair stylists to prevent the stylist from going to another salon and taking her customers with her. A non-compete agreement that prohibits a stylist from working as a stylist at a salon within ten miles might be reasonably restricted in geographic scope because that’s probably not too far for customers of the first salon to drive for a hair appointment. However, a non-compete agreement that prohibits the stylist from working as a stylist anywhere within a state is probably too broad because customers of the salon are not likely to follow the stylist all the way across the state. Similarly, a non-compete agreement that prohibits a hair stylist from working as a manager of a salon, even if she does not work as a stylist, might be too broad in scope because customers are not likely to switch from one salon to another because of the manager. And a non-compete agreement with the stylist that lasts for six months after the stylist leaves the salon may be reasonably restricted in time, but the same non-compete agreement that lasts for five years is likely too long because it would be unlikely for customers to move to a new salon because they will have had time to form relationships with another stylist at the first salon.
Anon-compete agreement that is overly broad in scope, geography, or time can sometimes by salvaged by careful drafting to take advantage of the “blue pencil doctrine.” That doctrine says that a court that finds a non-compete agreement too broad may edit the contract to make it enforceable provided the editing is limited to striking words or provisions. However, the court is not permitted to rewrite the provision entirely, and writing a provision that may allow a judge to “blue pencil” the contract requires careful research and careful drafting. At best, the blue pencil doctrine is a safety net, and few lawyers will write a non-compete provision that they know is too broad, relying on the blue pencil doctrine to save the day.
Many non-compete agreements are between employers and employees (or between independent contractors and their customers), but non-compete agreements are often found in contracts for the sale of a business. The seller of a business is often prohibited from competing with the business for some period after the sale is complete. While the principles described above apply in that context as well – i.e., the applicability must be restricted to a reasonable scope, a reasonable geographic area, and a reasonable period – what a court will deem “reasonable” is often different than what the same court will deem reasonable in the context of an employment agreement. If you need help drafting non-compete agreements, or if you need to enforce a non-compete agreement, or if you are subject to a non-compete agreement that you believe is overly broad, please feel free to contact us.